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1993 | Book

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An Econometric Analysis of Individual Unemployment Duration in West Germany

Author: Dr. Eckhard Wurzel

Publisher: Physica-Verlag HD

Book Series : Studies in Contemporary Economics

Included in: Professional Book Archive

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About this book

In contemporary labor economics increasing attention is paid to the fact that unemployment is not only a stock but also a flow phenomenon. The present micro-econometric study analyses the impact of important socio-economic characteristics on unemployment duration in West Germany. Based on a search theoretic framework unemployment duration is considered as a stochastic process whose evolution is influenced by economicand demographic variables like unemployment benefits, expected wage offers, training and age. This is modeled by application of the concept of the hazard rate which denotes the conditional exit rate from unemployment over time given elapsed unemployment duration. Contrasting more traditional models a semi-parametric approachis chosen which reduces the danger of mis-specification of the stochastic duration process. This procedure also is particularly suitable for the analysis of grouped observations on unemployment duration typically generated by longitudinal data sets as the German "Socio-Economic Panel" which is utilized for this study. Besides deriving a set of empirical results on unemployment duration in West Germanymethodological issues of duration analysis are considered with particular attention paid to the impact of the sample design. Also, important outcomes from search theory and findings from other hazard rate analysesare surveyed.

Table of Contents

Frontmatter
I. Introduction
Abstract
Traditionally, economic theory considered unemployment as a stock phenomenon to be explained within some equilibrium or disequilibrium framework. Also, it is usually a stock measure of unemployment, like some average unemployment ratio or the average number of persons who happened to be unemployed within a certain time period, that comes to the attention of the public. However, stock measures of unemployment only provide an incomplete picture of unemployment incidence. Unemployment is both, a stock and a flow phenomenon. One and the same stock can be generated by an infinite number of combinations of inflow and exit intensities into and out of unemployment, or, which is the same, of inflow intensities and unemployment durations. Furthermore, it is a stylized fact that inflow rates into and exit rates out of unemployment are not homogeneous over the labor force. Given these observations, over the past twenty years labor economists paid increasing attention to analyzing unemployment incidence at a disaggregated level. A substantial push to research interest in this topic can roughly be dated back to the release of the seminal volume on the microeconomics of employment and inflation theory by Phelps et al. (1970).
Eckhard Wurzel
II. Models of Individual Unemployment Duration
Abstract
In this chapter we are concerned with theoretical approaches to individual unemployment duration. In part II.1 we consider an adaptation of the well known static labor supply model to the determination of individual unemployment. Essentially, the model assumes a Walrasian environment in which each individual chooses the length of the period over which he wants to stay out of work. We then turn in part II.2 to a decentralized labor market in which information about job openings and wages are imperfect and job search becomes necessary. Job search models considered in this chapter constitute the main theoretical underpinning to the empirical analysis of unemployment duration.
Eckhard Wurzel
III. Hazard Rate Models
Abstract
The analysis of unemployment duration in this study is based on the concept of the hazard rate and of the survivor function which were introduced in chapter II.2 about search theory. In the present chapter the design of explanatory hazard rate models for individual unemployment duration is considered in detail and empirical findings are surveyed. The framework established in this chapter is then used in subsequent chapters to construct models for our empirical investigation. Firstly, in part III. 1 we focus on a “single risk” setting that only distinguishes two states “unemployment” and “not unemployment”. In chapter III.2 the framework is extended to “competing risks” models which explicitly distinguish between different post—unemployment states into which transition from unemployment can occur. In part III.3 the parameterization of the regression model is discussed. It is unlikely that all factors which influence unemployment duration can be incorporated into an empirical model. Part III.4 of the chapter therefore considers the influence of left-out variables on statistical inference. Finally, in part III.5 results from other investigations based on the hazard rate approach are reviewed.
Eckhard Wurzel
IV. Alternative Approaches for the Analysis of Duration Data
Abstract
In the last chapter we considered the construction of explanatory models for the probability of leaving unemployment built on the hazard rate concept. Clearly, application of hazard rate models is not the only way to analyze the impact of socio-economic characteristics on unemployment duration. In this chapter we consider three important alternative approaches. Though not only applied to unemployment duration data but also to unemployment stock data we begin with a look on time—series regression analysis of aggregate unemployment. This serves to demonstrate the type of specific complications that can be expected to arise if aggregate instead of individual unemployment data are analyzed. In chapter IV.2 we inspect an example for “structural” models of individual unemployment duration that aim at separate identification of variables affecting the reservation wage. Finally, chapter IV.3 demonstrates how inference on search behavior and exit from unemployment is possible without statistical modeling, but by computing exact elasticities of reservation wages and re—employment probabilities for individual unemployed.
Eckhard Wurzel
V. Sample Designs and Semi—Parametric Specification
Abstract
In the first part of this chapter we consider how information on unemployment duration is collected in the Socio—Economic Panel (SEP), and examine the implications of the SEP data collection scheme for the analysis of unemployment durations. Having clarified these issues, the semi—parametric model employed in this study will be specified in the second part of this chapter.
Eckhard Wurzel
VI. The Variables
Abstract
In this chapter we consider the economic and demographic variables that are relevant for our empirical analysis. The first part of the chapter is concerned with the notion of registered unemployment and characteristics and reliability of the sampled unemployment durations. In chapter VI.2 we consider the definition and the hypothesized impact of economic and demographic characteristics that are likely to affect a person’s perceived productivity, reliability and reservation wage, apart from unemployment benefits and wage offers. The relevance of the latter two variables for the determination of unemployment duration is particularly emphasized by search theory. We turn to these variables in the third part of the chapter and consider the measurement of unemployment benefits receipts and the construction of a measure for the mean of the wage offer distribution faced by the unemployed.
Eckhard Wurzel
VII. Results of the Hazard Rate Analysis
Abstract
In this chapter we turn to the empirical results from the hazard rate analysis of unemployment duration.
Eckhard Wurzel
VIII. Summary of Main Results and Outlook on Aggregate Unemployment
Abstract
This study is concerned with individual unemployment duration. Chapter II. reviewed the determination of individual unemployment duration in neoclassical labor supply theory and search theory. Chapter III. introduced hazard rate duration models and reviewed empirical findings from these models. In chapter IV. alternative empirical approaches for modeling unemployment duration and reservation wages were considered. Except for the time—series models with aggregate data considered briefly in chapter IV.1, this material also referred to individual duration models exploiting data sets on individual characteristics. In chapter V. the sample design for individual unemployment durations in the Socio—Economic Panel was considered and semi—parametric hazard rate models were constructed. These models were utilized to analyze the impact of socio-economic characteristics of interest on the probability of entering a new job and of leaving unemployment, respectively. The relevant variables for our models were discussed in chapter VI., and the results were presented in chapter VII. In the last chapter of this study I briefly summarize the main findings of the hazard rate analysis and show how the hazard rate framework can be utilized to connect individual unemployment durations with the steady state stock of aggregate unemployment. This analysis is simply “arithmetic” in that it translates given unemployment flows into unemployment stocks without considering the quality of an equilibrium.
Eckhard Wurzel
Backmatter
Metadata
Title
An Econometric Analysis of Individual Unemployment Duration in West Germany
Author
Dr. Eckhard Wurzel
Copyright Year
1993
Publisher
Physica-Verlag HD
Electronic ISBN
978-3-642-50298-9
Print ISBN
978-3-7908-0681-6
DOI
https://doi.org/10.1007/978-3-642-50298-9